Subscriptions are the most important revenue stream for software-as-a-service (Saas) businesses. Yet many accountants don’t correctly record that revenue in the company’s books. This makes it difficult to see your true financial position and make informed decisions.

What Is Deferred Revenue

Say your customer pays you $6,000 for a 1-year subscription. Instead of recording that entire amount in the month it was received, you divide it up evenly among the 12 months of the year — $500 per month.

How to Record the Payment

Since you obviously haven’t yet created balance sheets for the entire year, you’ll need away to credit the subscription payment on your balance sheet (not your income statement). In the month you receive the payment, debit the full amount in Accounts Receivable and credit the full amount in Deferred Revenue, like so:

The next month, debit the monthly amount of $500 from Deferred Revenue and credit it to Subscription Revenue. Follow the same procedure each month for the rest of the year.

If you want to be even more detailed, you could do daily entries instead of monthly. In that case, you would divide the monthly amount by the number of days in that month.

Why Deferred Revenue Is Better

 It keeps your income statement uncluttered and more accurate
 It’s easier to see whether your recurring revenue is growing, and by how much
 It’s easier for investors and banks to understand your business performance
 It allows you to calculate gross margin and recurring gross margin
 It allows you to determine metrics such as customer lifetime value or CAC payback period

Need assistance setting up a chart of accounts, balance sheet and income statement for SaaS deferred revenues? Xendoo’s small business experts have all the answers at their fingertips.

See for yourself with a one month free trial.